May 13, 2011

Higher Tax Rates Vs Higher Tax Income?

There is much debate about whether the tax rates should be kept low or raised to the rates prior to the George W. Bush years. This is the wrong debate. Instead we should be deliberating whether we need to reform our economic system. If our markets were more free we would have a wider distribution of income and the result would be more tax revenue to the government with lower rates.

The republicans speak with pride how the free market system is the best economic model for increasing the living standards of the nation and the citizens of the country. They resolutely proclaim that government needs to cut back on regulation and allow the free market to work. I personally find this hard to argue against.

However, what I do not understand is why most free market advocates are not up in arms over our markets and industries being taken over and controlled by a small group of firms in many of our industries. The founder of the concept of free markets said:

‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices" (Adam Smith, The Wealth of Nations, 1776)

The quote below is from the book Capitalism and Freedom written by Milton and Rose Friedman. Dr. Friedman is the economist who is quoted most often when conservatives are praising free markets and capitalism.

"But we cannot rely on custom or conscious alone to interpret and enforce the rules; we need an umpire.These then are the basic role of government in a free society; to provide a means where we can modify rules, to mediate differences among us on the meaning of rules, and to enforce compliance with the rules on the part of those few who otherwise would not play the game."

For whatever reason, this part of Dr. Friedman's philosophy is never mentioned when it comes to making "free markets" work.

Lack of freedom in the markets corrupts markets. It makes them inefficient. This lack of freedom causes prices to rise, less innovation, egregious salaries at the top and skewed income distribution, less competitiveness in markets and last but not least, consolidation of political power.